Fri 07/30/2021 07:00 AM
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Relevant Document:
NRC Fact Sheet on License Transfers

Talen Energy’s plans to construct a 100-megawatt digital currency-mining facility to boost utilization at its Susquehanna, Pa., nuclear facility has investors questioning how the company will raise capital to build the data center. As discussed by Covenants by Reorg, one potential move would be to transfer assets from the company’s restricted subsidiaries to unrestricted subsidiaries and then issue new debt or obtain a loan secured by those assets. According to Reorg’s analysis, in addition to $650 million of general-purpose transfer capacity, Talen could have an additional $2 billion of capacity to transfer assets to unrestricted subsidiaries, although those transfers would first have to be made to foreign subsidiaries, and then from the foreign subsidiaries to unrestricted subsidiaries.

Talen’s most valuable asset is its Susquehanna nuclear power plant. Although Talen’s debt documents may permit the company to transfer a significant amount of value away from lenders and bondholders, those transfers would almost certainly face significant regulatory hurdles and could delay the completion of the transfers for months, if not years.

To transfer ownership of the Susquehanna plant, the current owner entity would need to likewise transfer its nuclear facility operating license issued by the Nuclear Regulatory Commission, or NRC, which would require the NRC’s consent. Potential regulatory hurdles for any entity attempting to transfer an NRC license include financial requirements for license holders and restrictions on foreign ownership of nuclear facilities. The former is a practical concern for any NRC license applicant. The latter is particularly important for Talen in light of its debt documents’ requirement that asset transfers to unrestricted subsidiaries be made via a foreign subsidiary, even if temporarily.

According to Talen’s most recent financial statements, the Susquehanna plant is operated and 90% owned by Susquehanna Nuclear LLC, a direct subsidiary of Talen Energy Supply, pursuant to two NRC licenses for each of the plant’s two units. The other 10% is owned by Allegheny Electric Cooperative Inc., a generation and transmission cooperative based in Harrisburg, Pa.

The nuclear power regulatory landscape in the United States consists of the Atomic Energy Act and NRC regulations, which require nuclear facility owners and operators to obtain an operating license from the NRC, according to an extensive application process spelled out in the regulations. The primary qualifications for obtaining an NRC license are the financial ability to operate and decommission the facility, and the technical expertise needed to safely operate, both of which must be demonstrated to the NRC’s satisfaction. In addition, the NRC permits plant owners and operators to be separate entities.

The transfer of an existing NRC license is subject to a separate application process and requires the written consent of the NRC. In short, a license transferee must satisfy the same qualifications required of the initial licensee.

In evaluating an applicant’s financial ability to operate a nuclear facility, the NRC considers projected operating costs, revenue sources and other available sources of funding. In addition, the NRC requires financial assurance of available funding to decommission the facility upon the expected termination of operations. Decommissioning funding obligations are calculated using a formula set forth in the NRC regulations. According to Talen’s financial statements, Susquehanna Nuclear maintains a nuclear decommissioning trust, or NDT, to fund its proportional share of future decommissioning obligations, which was estimated to hold approximately $1.47 billion in cash and securities as of Dec. 31, 2020.

NRC regulations afford some potential flexibility as to actual funding sources, requiring only “reasonable assurance” of obtaining the needed funds. Although in the case of decommissioning obligations, “reasonable assurance” requires an actual financial instrument (such as Susquehanna Nuclear’s NDT, or an escrow account, surety or other guarantee), the regulations do not specify that the licensee applicant must itself possess or be the source of the funds. In other words, the NRC may accept funding from a parent company as sufficient for demonstrating the applicant’s financial qualifications.

For example, nuclear facility operator and former chapter 11 debtor FirstEnergy Solutions was required by the NRC to provide a “parental financial support agreement” of up to $400 million to its subsidiary that held an NRC license in order to provide financial assurance of the license holder’s ability to operate the facilities. Like Susquehanna Nuclear, the FirstEnergy license holder also maintained an NDT to provide financial assurance for its decommissioning obligations.

Thus, the NRC’s “financial assurance” requirements may not pose a meaningful obstacle for Talen as long as the NDT remains in place (or is likewise transferred) and operational funding from within the Talen corporate structure is available to the transferee unrestricted subsidiary, if needed. Moreover, the NRC’s technical requirements may be readily satisfied if Susquehanna Nuclear, who has presumably already met such standards, stays in place as operator.

An additional condition of licensure under the Atomic Energy Act and NRC regulations (for both initial and transferee licensees) is that no licensee may be “owned, controlled, or dominated” by a foreign individual or entity. The restriction on foreign ownership or control is codified in the NRC regulations at 10 CFR Part 50.38:
 
“Any person who is a citizen, national, or agent of a foreign country, or any corporation, or other entity which the Commission knows or has reason to believe is owned, controlled, or dominated by an alien, a foreign corporation, or a foreign government, shall be ineligible to apply for and obtain a license.”

According to the NRC’s summary of the license transfer process, this requirement is a security measure intended to prevent foreign control of safety-related activities at a nuclear facility. The restriction on foreign ownership could signal a potential complication for Talen given its need under its credit documents to transfer assets to an unrestricted subsidiary by way of a foreign subsidiary. NRC regulations, however, may provide enough flexibility for Talen to obtain approval of a license transfer, even if ownership is temporarily passed through a foreign entity, so long as safety-related decisions at the Susquehanna plant remain controlled by a U.S. entity. This could be accomplished if Susquehanna Nuclear remains the facility’s operator despite transferring its ownership stake.

The NRC website provides an instructive example in the 1999 license transfer for Three Mile Island Unit 1 to AmerGen Energy Co., which was 50% owned by British Energy plc, a foreign company, and 50% by Peco Inc., a U.S. company. As a result of the 50% foreign ownership, explains the NRC, “the NRC required AmerGen to have a plan to ensure there would be no foreign control.” Specifically, the NRC required Peco Inc. to “have control over safety-related decisions” and required those decisions to be made by U.S. citizens.

Although instructive, the Three Mile Island precedent may not be entirely on point, since Talen’s potential transfer would require that Susquehanna Nuclear’s full 90% ownership stake be transferred to a foreign subsidiary, even if the foreign ownership would be temporary. Nevertheless, because the foreign subsidiary would presumably be 100% owned by Talen, the transfer could be approved if the NRC focused on the credentials of the operational entity of the nuclear power plant, not the ownership entity. Furthermore, the NRC may focus on the ultimate, U.S.-based transferee and/or on Allegheny Electric Cooperative’s 10% ownership stake, which would presumably remain in place.

In the chapter 11 context, NRC licenses were considerations in the chapter 11 plans of reorganization for NRC-regulated companies FirstEnergy, which owned and operated several nuclear facilities, and USEC Inc., which supplied enriched uranium to nuclear power plants. Both plans provided for a change in ownership of the debtors through the issuance of new stock to the companies’ creditors and contemplated that the respective licenses would remain with the reorganized debtor entities that held the applicable license prior to chapter 11.

In FirstEnergy’s plan, the NRC’s approval of a license transfer or new license application for the reorganized licensee entities was a condition precedent to the plan’s effective date. In USEC’s case, the disclosure statement explained that the NRC determined that USEC’s restructuring transactions “would not be viewed as a direct or indirect transfer of control requiring advance written consent from the NRC.” In other words, USEC was not required to obtain NRC approval in order for the reorganized license holder to retain the NRC license.

Finally, it appears that the NRC has an updated filings database that includes corporate filings, including those seeking regulatory approvals. To the extent Talen opted to pursue a transfer of Susquehanna, its filings would likely be included in this database.

While the potential regulatory hurdles to any transfer of the Susquehanna facility may not be insurmountable for Talen, the process would likely be a lengthy one subject to complex regulatory requirements. As a result, although Talen’s debt documents could provide the company with significant flexibility to transfer assets to an unrestricted subsidiary and enable that subsidiary to raise debt to construct the 100-MW digital currency-mining facility, that flexibility may be offset by a rigorous and likely lengthy regulatory oversight and approval process.
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